Nationlal leader has given a lion's share of government projects to state over private interests, an allocation critics say has decelerated the economy

Indonesian President Joko Widodo (C), accompanied by officials, switches on a tunnel boring machine for the Mass Rapid Transport system under construction in the capital city during a launch ceremony on September 21, 2015. Jakarta's first mass rapid transport system is expected to be finished in 2018. Photo: AFP/Romeo Gacad

Indonesia’s business community is growing increasingly agitated over the way state-owned enterprises (SOEs) win the lion’s share of government projects, a trend that began with the previous administration and is now reaching unprecedented levels under President Joko Widodo.

The issue appears to have caused a rift between State Enterprise Minister Rini Soemarno and Maritime Affairs Coordinating Minister Luhut Panjaitan, President Joko Widodo’s chief political adviser and a key organizer of the president’s gathering 2019 re-election bid.

“I have told the president this is not healthy,” said Panjaitan, a retired general whose recent 70th birthday celebration was attended by large numbers of ethnic Chinese businessmen, many of whom are expected to provide the financing for Widodo’s campaign.

But as the recent Jakarta gubernatorial election showed, Widodo’s policies – including a customs department slow-down and new import restrictions — have split that community and would have done more damage if it had not been for fears of escalating sectarianism.

Policy contradictions, compounded by an intransigent bureaucracy, have become a disturbing feature of the Widodo administration and are the reason why Indonesia has failed to attract more foreign investment needed to push economic growth beyond 5%.

That leads into a broader debate about Widodo’s management of the overall economy. “The real question is who is in charge because it is undermining confidence,” says one senior banker. “It’s been clear for a while that Jokowi (Widodo) is out of his element. The policy-side suggests general confusion. There is nothing going on in the real economy.”

A worker holds steel bars on a construction site of a new apartment in Jakarta, Indonesia February 22, 2016. Photo: Reuters/Beawiharta

The World Bank and the Indonesian Chamber of Commerce (Kadin) have both added their voice to the chorus of criticism over the way the 118 SOEs and their more than 800 subsidiaries have been eating up the private sector’s market share.

During a visit to Jakarta last July, World Bank chairman Jim Yong-kim raised the hackles of Economic Coordinating Minister Darmin Nasutian by saying the government should stop giving privileges to SOEs to help create healthier competition.

While the blame also rests with red tape and land issues, Nasution’s own officials have acknowledged that only 31% of pledged domestic investment and 27% of foreign investment has been realized over the past decade.

Panjaitan contends the many state firms competing with private business are acting as a drain on the national budget. But Soemarno, a businesswoman in her own right, has fended off the criticism, even calling for an increase in the 472 trillion rupiah (US$35.8 billion) allocated to her ministry this year.

“We should be proud of this because it means we have been successful in performing our functions,” she said last July. “SOEs should always have more capability than private companies. They keep us from losing more and more of our assets.”

A state-owned Pertamina worker take a rest under oil pipes in a file photo: Photo: Reuters/Beawiharta

The US State Department’s Office of Investment Affairs noted some interesting anomalies in a report issued last December on an SOE empire worth an estimated 3.9 quadrillion rupiah (US$300 billion) in total assets:

* Only 10 of the holding companies contribute to more than 85% of total SOE profit.

* Just 20 SOEs have listed on the Jakarta Stock Exchange (JSE), with a market capitalization of 1.1 quadrillion rupiah (US$85 billion), or 25.52% of the JSE’s total.

Nominally, private companies can compete with SOEs in terms of access to markets, credit and other business operations. But many sectors report that state firms are increasingly being favored for government projects, apparently because of their ability to cut regulatory corners.

The trend is particularly evident in the infrastructure sector. Impatient with the slow progress of private contractors, Widodo turned to state-owned construction firms to lead the current road and rail-building boom, which the president hopes will help him win re-election.

But while private business find it hard to compete, there have been signs that state firms like power provider Perusahaan Listrik Negara (PLN) are feeling the strain and that a large portion of SOE debt may be off the books.

Finance Minister Sri Mulyani Indrawati recently sent a letter to Mines and Energy Minister Ignasius Jonan warning of the increasing financial burden PLN will have to bear in Widodo’s ambitious plan to add 35,000 megawatts (MW) to the national power grid.

Already saddled with 296 trillion rupiah (US$22.2 billion) in debt, PLN is committed to building 10,000MW of that capacity. But critics, Panjaitan among them, say the company should be concentrating instead on transmission, which by law isn’t open to private companies.

The leaked letter said PLN was not generating sufficient revenues to support the building of new power plants, noting that in the past three years the finance ministry had to seek waivers from PLN creditors to allow the company to breach the debt limit in its loan agreement.

Previous governments had maintained a policy of using private developers to build additional power generation, particularly on the main Java-Bali grid where demand grows by 7%-8% a year.

Among the 118 SOEs, 30 are engaged in manufacturing, 22 in transportation and logistics – where Indonesia struggles to be competitive — 21 in financial services and insurance, and 10 each in construction and professional and technical services.

According to recent data, state enterprise companies employ 781,700 workers and support an army of 975 commissioners and directors, many of them retired senior military officers and bureaucrats who are each reported to earn a minimum of 1 billion rupiah (US$75,843) a year.

Indonesia President Joko Widodo at an Independence Day ceremony at the Presidential Palace, August 17, 2017 Photo: Antara Foto via Reuters/Puspa Perwitasari

Although the ministry announced plans in late 2015 to consolidate the SOEs into 16 sectoral holding companies, starting with Pertamina (oil and gas), Inalum (mining), Danareksa (financial services) and Bulog (food commodities) little progress appears to have been made.

Weighed down by inefficiency, corruption and opacity, reformists say unless the number is pared down they will continue to act as a brake on the development of medium-sized ventures needed to generate employment in the formal sector.

The best way forward, they argue, is for the enterprises to be limited to sectors where they have a comparative advantage and for the survivors to be listed on the JSE so they will be subject to disclosure requirements and independent audits.

Until that happens, economists warn that the misallocation of financial resources — typified by the economic domination of SOEs — and under-investment in human resources, will prevent Indonesia from reaching its economic potential.

For all the concerns about conservative Islam and how it may impact on the national stage, it is the economy that seems to represent Widodo’s Achilles heel in the run up to 2019. Indeed, it may even negate the credit he has received for infrastructure development in which he has placed so much trust.